Weaker growth and lower inflation path are created by central banks of Central and Eastern Europe for interest rate reduction space – Citi economists assess. In their opinion, in Poland there is space for reduction of interest rates of 200 PB or more.
“Mutual duties higher than expected mean a stronger negative impact on GDP growth in Central Europe, mainly due to their negative impact on the economic growth in the world and in the euro area” – it was written in the bank's report.
“Even if the EU took retaliation, introducing 20 percent duties on all goods from the US (which is not our base scenario), the inflation inflation on inflation would still be negative. Weaker growth and lower inflation path create the central banks of Central and Eastern Europe for the reduction of interest rates” – added.
In the opinion of Citi economists, arguments in favor of a more pigeon attitude of central banks will not only depend on how duties will affect economic growth and inflation, but also on how they will affect the risk/currency bonus.
“The script of a serious slowdown or recession in the USA is usually not beneficial for the currency of emerging markets, but the currencies of Central and Eastern Europe are usually more correlated from the euro than USD. What's more, moderate depreciation can be accepted by central banks in the region as a natural reaction to the deteriorating prospect of global growth” – wrote in the report.
“Given the potentially more favorable inflation prospects, we would expect that central banks in Central and Eastern Europe will become more pigeons compared to our previous base scenario” – added.
According to economists, this effect will probably be the most visible in Poland, where the central bank kept the feet for a long time and where – according to Citi – there is a space for foot reductions by 200 PB, and maybe even more.
“Also, the Czech National Bank may now be less concerned about base inflation perspectives, which should allow decision -makers to continue foot reductions in the coming months (we expect an additional 50 pb in the current cycle)” – wrote in the report.
“In both cases, we believe that the risk is on the side of even greater loosening, because in new circumstances it will be easier for decision-makers to lower the feet below the relevant neutral levels. Among the central banks of Central and Eastern Europe, the National Bank of Hungary will be the most cautious, but even there deteriorating growth prospects can allow some loosening, although probably only until the end of 2025.” – Added.
As indicated by the authors of the report, the customs imposed on Europe are higher than assumed in the current macroeconomic scenarios.
“As members of the EU, the economy of Central Europe are covered by the new 20 % duties imposed by the US administration on all goods imported from the EU. report.
Export from Central and Eastern Europe to the USA is relatively small – it accounts for about 3 percent. Considering the indirect routes, i.e. the added value exported to the EU, and then recipient in some form to the US, this share increases to about 7 percent. This means that the direct impact of new duties on activities will be limited, although the indirect effects are more difficult to ignore ” – he added.
Considering the new duties, Citi economists raised their estimates of the negative impact on the euro area GDP to about 1 percentage point.
“In our opinion, this would mean about 0.7 percentage of percentage on GDP growth in the Czech Republic and Hungary and about 0.4 percentage points in Poland. Half of this impact is already included in our forecasts, so the potential corrections of our growth scenarios for Central and Eastern European countries would not be moderate and generally should not exceed 0.35 percentage point” – written in the report.
Citi economists point out that it is also possible to emerge nonlinear, negatively affecting the economies of Central and Eastern Europe.
“We are worried that major changes in duties have a non -linear effect on the economic situation, and therefore the general impact can now be underestimated. First of all, companies can easily absorb small or moderate changes in the targets/costs, but in the case of 20 % of customs Ceals, the impact on the decisions of companies and consumers may be disproportionately greater. Secondly, simultaneously, simultaneous growth of tariffs in all main economies can cause unexpected effects. Manufacturers from other countries, in particular from Asia, can redirect part of the export to the EU market ” – it was written.
“We also believe that the environment of the escalation of commercial wars, raising barriers in trade and de-de-globalization is not favorable to Central and Eastern Europe, one of the regions that have so far used the integration with global supply chains”-added.
In the opinion of Citi economists, the impact of the net duties on inflation will probably be negative.
“The EU is still considering what retaliation to take, but it seems that the reaction will be weaker than the US decision of the duties itself. In our opinion, even if the EU introduced 20 percent of customs duties to all consumer goods imported from the USA and even if these tariffs were fully transferred to consumer prices, this would not change the general CPI path” – wrote in the report.
“Considering the low level of imports of American consumer goods to the region, inflation rates in Central and Eastern European countries would increase by less than 0.05 percentage points. In turn, the impact of recession in the USA and the euro area, and more importantly, potential, potential redirection of trade from third countries may have a more important (negative) impact on the prices in Central Europe” – Added. (PAP Biznes)
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